the case study “Uber Digitally Disrupts the Taxi Industry” in Ch. 10 “E-Commerce: Digital Markets, Digital Goods” of Essentials of MIS.
Answer the following questions:
You’re in New York, Paris, Chicago, or another major city and need a ride. Instead of trying to hail a cab, you pull out your smartphone and tap the Uber app. A Google map pops up displaying your nearby surroundings. You select a spot on the screen designating an available driver, and the app secures the ride, showing how long it will take for the ride to arrive and how much it will cost. Once you reach your destination, the fare is automatically charged to your credit card. No fumbling for money.
Rates take into account the typical factors of time and distance but also demand. Uber’s software predicts areas where rides are likely to be in high demand at different times of the day. This information appears on a driver’s smartphone so that the driver knows where to linger and, ideally, pick up customers within minutes of a request for a ride. Uber also offers a higher-priced town car service for business executives.
Uber runs much leaner than a traditional taxi company does. Uber does not own taxis and has no maintenance and financing costs. It does not have employees, so it claims, but instead calls the drivers independent contractors, who receive a cut of each fare. Uber is not encumbered with employee costs such as workers’ compensation, minimum wage requirements, background checks on drivers, driver training, health insurance, or commercial licensing costs. Uber has shifted the costs of running a taxi service entirely to the drivers and to the customers using their cell phones.
Uber relies on user reviews of drivers and the ride experience to identify problematic drivers and driver reviews of customers to identify problematic passengers. It also sets standards for cleanliness. It uses the reviews to discipline drivers. Uber does not publicly report how many poorly rated drivers or passengers there are in its system.
Uber is headquartered in San Francisco and was founded in 2009 by Travis Kalanick and Garrett Camp. By 2015, it had more than 162,000 drivers working in 200 cities and 55 countries generating revenue of $10 billion and earnings (after paying its drivers) of $2 billion. More than 100,000 people use Uber on a regular basis. However, Uber’s over-the-top success has created its own set of challenges.
By digitally disrupting a traditional and highly regulated industry, Uber has ignited a fire storm of opposition from existing taxi services in the United States and around the world. Who can compete with an upstart firm offering a 40 percent price reduction when demand for taxis is low? (When demand is high, Uber prices surge.) What city or state wants to give up regulatory control over passenger safety, protection from criminals, driver training, and a healthy revenue stream generated by charging taxi firms for a taxi license?
If Uber is the poster child for the new on-demand economy, it’s also an iconic example of the social costs and conflict associated with this new kind of business model. Uber has been accused of denying its drivers the benefits of employee status by classifying them as contractors; violating public transportation laws and regulations throughout the United States and the world; abusing the personal information it has collected on ordinary people; and failing to protect public safety by refusing to perform criminal, medical, and financial background checks on its drivers;
Critics fear that Uber and other on-demand firms have the potential for creating a society of part-time, low-paid, temp work, displacing traditionally full-time, secure jobs—the so-called Uberization of work. Uber responds to this fear by saying it is lowering the cost of transportation, expanding the demand for ride services, and expanding opportunities for car drivers, whose pay is about the same as other taxi drivers.
Does Uber have a sustainable business model? If the company continues to triple revenue every year, the answer is yes, but Uber has competitors, including Lyft in the United States and local firms in Asia and Europe. New, smaller competing firms offering app-based cab hailing services are cropping up, including Sidecar, Via, Tipda, and Shuddl. Large taxi firms in New York City are launching their own hailing apps and trumpet their fixed-rate prices. Uber is pressing on, with a new service for same-day deliveries, and continuing to disrupt established industries.
Sources: Vindu Goel, “The Gap Between Auto Dealers and Social Media,” New York Times, April 9, 2015; Christopher Mims, “How Everyone Misjudges the Sharing Economy,” Wall Street Journal, May 26, 2015; Douglas Macmillan, “Icahn Puts Big Wager on Uber Rival Lyft,” Wall Street Journal, May 16, 2015; Douglas MacMillan, “The $50 Billion Question: Can Uber Deliver?” Wall Street Journal, June 15, 2015; Dave Peterson, Al Ramadan, and Christopher Lochhead, “Uber: The Great Disruptor of Pizza Delivery? Fortune, June 25, 2014; and Erin Griffith, “A Brief History of Uber’s Controversies,” Fortune, November 18, 2014.
Uber exemplifies two major trends in e-commerce today. This e-commerce business is powered by the near-ubiquitous use of mobile smartphones, and it is one of so-called on-demand companies such as Lyft (Uber’s primary competitor), Airbnb (rooms for rent), Handy and Homejoy (both part-time household helpers), Instacart (grocery shoppers), and Washio (clothes washing). These on-demand firms don’t sell goods; instead, they have built a platform by which people who want a service—such as a taxi—can find a provider to fill the demand. On-demand firms are currently considered the hottest business model in e-commerce, and they are disrupting major industries.
The chapter-opening diagram calls attention to important points this case and this chapter raise. The business challenge facing Uber is how to create a profitable company based on a new, on-demand business model. Uber’s management decided to base its business on the use of wireless smartphones and apps that link buyers and sellers of taxi transportation services. The business earns revenue by charging users’ credit cards for fares and giving a percentage of each fare to the driver, and it can charge prices that vary dynamically with demand. Uber has a lower cost structure than traditional cab companies because it does not have to pay employee wages or benefits, auto insurance, fuel, and licensing fees. Participating drivers pay for their own cars, fuel, and insurance. Under certain conditions, if demand is high, Uber can be more expensive than taxis, but it has disrupted the taxi industry because it offers a reliable, fast, convenient alternative to traditional taxi companies that book rides using the telephone, a central dispatcher using antiquated radio communications, or potential customers standing on street corners trying to hail a cab. Uber’s growth is skyrocketing, but the company has to contend with many competitors and political and regulatory opposition from workers and the industries it is disrupting. It is still too early to tell whether Uber and other on-demand businesses will succeed.
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